Clarke Inc. — Management Reports 2024

Mar 6, 2024

Management’s Discussion & Analysis

Clarke Inc.

December 31, 2023 and 2022

MANAGEMENT’S DISCUSSION & ANALYSIS

Management’s Discussion & Analysis (“MD&A”) presents management’s view of the financial position and performance of Clarke Inc. (“Clarke” or the “Company”) for the year ended December 31, 2023 compared with the year ended December 31, 2022. The following information is derived from the Company’s consolidated financial statements which are prepared with accounting standards in accordance with International Financial Reporting Standards (“IFRS” or “IFRS Accounting Standards”) as issued by the International Accounting Standards Board. This MD&A should be read in conjunction with the information disclosed in the consolidated financial statements and notes thereto for the year ended December 31, 2023 and the Company’s Annual Information Form (“AIF”), including the risk factors described therein, available on SEDAR+ at www.sedarplus.ca. This MD&A provides an overall discussion and analysis of the Company’s performance. The MD&A is prepared as at March 6, 2024 (unless otherwise stated). All dollar amounts are shown in millions of Canadian dollars except for per common share amounts or unless otherwise indicated.

OVERVIEW & STRATEGY

Clarke was incorporated on December 9, 1997 pursuant to the Canada Business Corporations Act and its head office is located at 145 Hobsons Lake Drive, Halifax, Nova Scotia.

The Company is an investment and real estate company with holdings in a diversified group of businesses and across real estate sectors. The Company operates primarily in Canada. The Company continually evaluates the acquisition, retention, and disposition of its holdings and changes in its asset mix should be expected. Our objective is to maximize shareholder value. While not the perfect metric, we believe that Clarke’s book value per share[1] , together with the dividends paid to shareholders, is an appropriate measure of our success in maximizing shareholder value over time.

We attempt to maximize shareholder value by allocating capital to investments that we believe will generate high returns and reallocating capital over time as needed. In doing this, Clarke’s goal is to identify investments that are either undervalued or are underperforming and may be in need of positive change. These investments may be real estate, companies, securities or other assets. Clarke has a diverse and significant portfolio of direct real estate holdings across the hospitality, commercial, industrial, and residential sectors. We do not believe in limiting ourselves to specific types of investments. Clarke generally invests in industries that have hard assets, in particular, hospitality and real estate businesses.

REVIEW AND OUTLOOK[1]

During 2023, the Company’s book value per common share increased by $1.25, or 8%. The change can be attributed to (i) hotel net operating income of $22.5 million or $1.60 per share, (ii) revaluation gains on certain hotel properties of $16.1 million or $1.14 per share and (iii) a gain on the disposition of the Company’s share in a joint operation of $8.1 million or $0.58 per share, offset by (iv) combined fair value adjustments and realized losses on investment properties of $7.8 million or $0.56 per share, (v) interest and accretion of $7.2 million or $0.51 per share and (vi) depreciation and amortization of $10.2 million or $0.72 per share. The Company’s book value per common share at the end of the year was $16.53 while our common share price was $14.28.

RESULTS OF OPERATIONS

The Company’s net income was $3.4 million compared to $3.2 million in 2022 and $16.4 million in 2021. The Company’s operating businesses were significantly more profitable in both 2023 and 2022 compared to 2021, in particular the Company’s hotels. Hotel revenue for the year ended December 31, 2023 was $64.2 million compared to $54.7 million and $32.0 million in 2022 and 2021, respectively. The hospitality segment’s net income before taxes was $10.9 million for the year ended December 31, 2023 compared to $9.2 million in 2022 and $1.4 million in 2021. Net income in 2023 and 2022 was fueled primarily by the Company’s operating businesses, whereby in 2021, net income was primarily driven by gains on the Company’s marketable securities.

Comprehensive income for the year ended December 2023 was $17.1 million compared to $10.1 million in 2022 and $45.5 million in 2021. Comprehensive income in the year ended December 31, 2023 exceeded 2022 due primarily to remeasurement losses on the Company’s defined benefit pension plans recorded in other comprehensive income (“OCI”) in the prior year, partially offset by revaluations on certain hotels that were more significant in 2022 than in 2023. Comprehensive income in 2021 was fueled by gains on marketable securities and its defined benefit pension plans as well as revaluation gains on the Company’s hotels.

1 This MD&A refers to "book value per share” and “net operating income”. These are non-IFRS measures and ratios. Refer to the “Cautionary Statement Regarding Use of Non-IFRS Accounting Measures and Ratios” section of this MD&A for more information.

2

Highlights of the consolidated financial statements for the last three completed fiscal years are as follows:

	Year ended	Year ended	Year ended
	December 31, 2023	December 31, 2022	December 31, 2021
	$	$	$
Hotel and rental revenue	65.2	54.7	32.0.
Provision of services revenue	8.2	9.7	9.4.
Investment and other income *	4.0	2.8	24.6.
Net income	3.4	3.2	16.4.
Other comprehensive income	13.7	6.9	29.1.
Comprehensive income	17.1	10.1	45.5.
Basic earnings per share (“EPS”)	0.24	0.23	1.12.
Diluted EPS	0.24	0.23	0.96.
Total assets	395.1	416.1	384.6.
Total liabilities	164.4	201.2	176.0.
Long-term financial liabilities	120.6	62.7	107.2.
Book valueper share	16.53	15.28	14.48.

*Investment and other income includes unrealized and realized gains and losses on assets and liabilities, fair value changes of property and equipment and investment properties presented in the statement of earnings, interest income, pension expense/recovery and foreign exchange gains/losses.

Real Estate and Corporate

Construction continues on the first phase of the development on Carling Avenue in Ottawa, ON. The development, which is branded as the “Talisman” , will consist of a five-building residential rental complex including extensive tenant amenities, parkland and ground-floor commercial space. The Talisman’s first phase, which is two towers and 404 rental units, is nearing completion, and we expect to welcome our first residents in the second quarter of 2024. The Company’s former Travelodge[®] Ottawa West hotel was closed in November 2023 and is currently being demolished on the future site of the Talisman’s second phase. The second phase will consist of three towers and 612 rental units.

During the fourth quarter of 2023, The Company finalized the exit of its one-third ownership in the 1111 Atwater Avenue development in Montreal, QC (“1111 Atwater”). The Company received net proceeds of $26.2 million, including cash of $16.5 million and a $9.7 million loan receivable from one of its former partners in the development. The loan is secured by the borrower’s 50% stake in 1111 Atwater. The Company recognized a gain on disposition of $8.1 million. The Company remains a guarantor on the construction loan of the 1111 Atwater development for an aggregate amount of $27.7 million. The Company has an indemnity agreement with its former partners for this guarantee until it is released. The Company expects the guarantee to be released in 2024.

During the fourth quarter of 2023, the Company sold two of its office buildings located in Houston, TX, for net proceeds of $7.5 million. The Company recognized a combined $4.3 million fair value adjustment and loss on disposition on these assets. In addition, the Company recorded a fair value adjustment on an additional investment property in Houston for $3.5 million.

During the third quarter of 2023, the Company redeemed its $34.9 million, 5.50% Series B Convertible Unsecured Subordinated Debentures, which were to mature on January 1, 2028 (the “Debentures”) for a cash outlay of $35.4 million which included $0.5 million of accrued interest. The redemption of the Debentures was financed using funds drawn on a credit facility obtained from a related party. Refer to the “Liquidity and Capital Resources” section of this MD&A for more information on this credit facility. The Company recorded a loss of $0.8 million on the redemption, representing the difference between the carrying value and principal amount of the Debentures.

During the second quarter of 2023, one of the Company’s pension plans purchased a group buy-out annuity for its members for a cash outlay of $4.5 million.

The Company has $125.8 million of debt and has access to two secured, revolving credit facilities. The Company’s maximum combined borrowing base under these revolving credit facilities was $85.0 million. As of December 31, 2023, the maximum availability on these facilities was $77.8 million, of which $3.8 million was drawn and $74.0 million was undrawn and available.

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Hotel Operations

In the first half of 2022, the Canadian hotel industry had generally rebounded from the COVID-19 pandemic. As such, 2023 was our first full year of results that were not materially impacted by the pandemic since 2019, which is why 2023 and 2022 are generally more comparable than recent year-over-year annual results.

We are pleased with the increase in hotel revenue as it was achieved despite the temporary closure of three hotels due to wildfires and the winding down and ultimate closure of our former Travelodge Ottawa West hotel. Additional reasons for the increase year-over-year include a full year of operations at the Stanford Inn & Suites, acquired in 2022 and generally stronger results across the majority of the hotel portfolio.

We continue to proactively evaluate potential renovations and conversions of our hospitality assets in an effort to maximize the respective asset’s value. During 2023, we converted one hotel to a residential investment property. This 82-unit asset was renovated in phases over the past two years, de-branded and completed at the end of 2023. This was a major milestone for the Company that we will use as an example if similar opportunities present themselves. In addition, we commenced the partial conversion of one hotel into a mixed-use asset, which includes the renovation and conversion of approximately 100 hotel rooms into 80 residential units. We will continue to explore more long-term stay offerings and potential residential conversions if these are deemed accretive to the Company.

BOOK VALUE PER SHARE

The Company’s book value per share at December 31, 2023 was $16.53, an increase of $1.25 since December 31, 2022. The following graph illustrates Clarke’s book value per share, share price and cumulative dividends paid over the past ten years.

==> picture [502 x 214] intentionally omitted <==

----- Start of picture text -----

$17.00
$16.00 16.53
$15.00 14.28
15.28
$14.00 15.06 14.48
$13.00 12.50 12.44 12.48
$12.00 12.57 12.21 10.45 12.21 10.32
$11.00$10.00 10.00 9.86 11.61 9.36 10.71 11.20
8.68 8.68 8.68 8.68
$9.00
$8.00
$7.00
$6.00 5.10 5.10 5.10 6.68
$5.00
$4.00 3.10
$3.00
$2.00
0.90
$1.00 0.50
$0.00
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Book Value per Share Cumulative Dividend Clarke Share Price
----- End of picture text -----

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SEGMENT REPORTING

The table below summarizes the Company’s assets by segment. The Other category is not a segment and is disclosed for reconciliation purposes. It consists of the Company’s treasury and executive functions, unsecured revolving credit facilities, pension plans and the Debentures until their redemption in 2023.

	December	31,	2023	December	31,	2022
Segment	$		%	$		%
Investment	139.1		35.2	157.6		37.8
Hospitality	221.2		56.0	227.4		54.7
Other	34.8		8.8	31.1		7.5
Total	395.1		100.0	416.1		100.0

Investment segment

The Investment segment represents the Company’s ferry business, investment properties and until its disposition, the 1111 Atwater development. The Hospitality segment consists of the Company’s ownership, management and operation of hotels.

During the fourth quarter, the Company sold two of its investment properties located in Houston, TX. The Company also evaluated whether these purchase prices were indicative of the fair value of the Company’s remaining Houston, TX investment property. Using management’s professional judgement and expertise, the Company estimated the value of this remaining investment property and recorded a fair value decrease. The aggregate fair value decrease and eventual loss on disposition of the Company’s investment properties of $7.8 million is presented in investment and other income within the statement of earnings for the year ended December 31, 2023.

The Company owns a passenger/car ferry that has been operating on the St. Lawrence River under contract with the Government of Québec since 1973. The ferry does not operate during the first quarter of the year and completes its annual maintenance and repairs during this off-season period. The ferry’s 2023 season ran from April 6, 2023 until January 2, 2024 and will commence its 2024 season on March 28, 2024.

Hospitality segment

Results for the year ended December 31, 2023 compared to the year ended December 31, 2022 are as follows:

	Year ended	Year ended
	December 31,	December 31,
	2023	2022
	$	$
Hotel revenue	64.2	54.7
Investment and other income	4.3	1.8
Total revenue and other income	68.5	56.4
Less:
Hotel operating expenses, property taxes and insurance	42.5	34.7
Depreciation and amortization	10.0	9.4
Interest and accretion	5.0	3.0
Income before income taxes	10.9	9.2

Investment and other income for the Hospitality segment is comprised primarily of fair value adjustments of $4.3 million and $1.3 million, recorded on certain hotels in the years ended December 31, 2023 and 2022, respectively.

Hotel revenue was $64.2 million for the year ended December 31, 2023 compared to $54.7 million in 2022. Income before taxes was $10.9 million for the year ended December 31, 2023 compared to $9.2 million in 2022.

In 2022, the Company recognized non-recurring government grants in this segment totaling $4.0 million as a direct reduction of hotel operating expenses, property taxes and insurance. In addition to the increased business levels in the year, this is a key driver of the increased hospitality expenses compared to 2022.

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OUTSTANDING SHARE DATA

At March 6, 2024, the Company had:

• An unlimited number of common shares authorized and 13,958,157 common shares outstanding; and

• An unlimited number of First and Second Preferred Shares authorized and none outstanding.

REPURCHASE OF COMMON SHARES

The Company periodically files normal course issuer bids to purchase its securities. The Board of Directors and senior management are of the opinion that, from time to time, the purchase of common shares at the prevailing market price may be a worthwhile use of funds and in the best interest of the Company and its shareholders. A summary of the repurchases under these normal course issuer bids outstanding within fiscal 2023 and 2022 are as follows:

Bid Date	Expiry	Maximum #	Repurchased#
June 29, 2021	June 28, 2022	733,608	451,500
June 29, 2022	June 28, 2023	711,543	237,025
July4,2023	July3,2024	699,232	31,600

LIQUIDITY AND CAPITAL RESOURCES

On October 30, 2023, the Company renewed a maturing credit facility. The $55.0 million credit facility is comprised of a $25.0 million term loan and a $30.0 million revolving line of credit. The revolving line of credit bears interest at prime plus 1.00% and the term loan bears interest at a fixed rate of 6.95% with a 25-year amortization period. The credit facility has a four-year term and is secured by a registered charge on five hotel properties.

On October 13, 2023, the Company amended one of its revolving lines of credit to increase the maximum borrowing capacity from $40.0 million to $55.0 million. The Company pledged an additional hotel property and its ferry operations, both previously unencumbered as part of this amendment. In addition to this incremental security, the facility is secured by a registered charge on five hotel properties and one office building.

On July 28, 2023, the Company redeemed its outstanding Debentures. The redemption was financed using a $35.0 million credit facility with an entity owned by the Company’s Chairman and his immediate family member. This facility has a maximum borrowing capacity of $35.0 million, bears interest at 6.00% and has interest-only payments until January 1, 2028. After January 1, 2028, the facility will continue as a revolving line of credit due on demand.

On February 9, 2023, using available funds from its revolving credit facilities, the Company repaid a term loan of $11.0 million, which was secured by a second lien on five hotels and three investment properties.

In the year ended December 31, 2022, the Company entered into a $85.0 million construction credit facility for the construction of the first phase of the Talisman. The facility is available to the Company as construction costs are incurred, bears interest at the lender’s prime rate and has a three-year term. The Company made draws totalling $41.3 million on this credit facility during the year ended December 31, 2023.

The Company monitors and forecasts its cash balances and cash flows to meet its required obligations. The Company believes it has access to sufficient capital through cash on hand, operating cash flows and existing borrowing facilities to meet its obligations as they come due.

Cash flow from operating activities

Cash provided by operating activities was $8.2 million for the year ended December 31, 2023, compared to $3.4 million in 2022. In both 2023 and 2022, this was primarily the result of cash generated from hotel and ferry operations offset by capital expenditures on the Company’s real estate inventory under development.

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Cash flow from investing activities

Cash used in investing activities was $24.9 million for the year ended December 31, 2023, compared to $36.8 million in 2022. The cash used was primarily attributable to progress on the Talisman development and capital expenditures for the hotel portfolio. These cash outflows were partially offset by the proceeds on disposition of 1111 Atwater and two investment properties in Houston, TX. In 2022, the use of cash was primarily due to the acquisition of the Stanford Inn & Suites hotel in Grande Prairie, AB for $11.6 million and capital expenditures for both the Carling Avenue Development and the hotel portfolio of $31.8 million.

Cash flow from financing activities

Cash provided from financing activities was $16.6 million for the year ended December 31, 2023, compared to $16.1 million in 2022. This was primarily the result of net proceeds of long-term debt of $88.9 million, offset by the repayment of long-term debt of $13.4 million, the redemption of the Debentures of $34.9 million, repayment of short-term indebtedness of $22.3 million and the repurchase of common shares of $1.5 million. Cash provided in 2022 was primarily related to an increase of $26.1 million in short-term indebtedness and the proceeds of long-term debt of $13.7 million offset by the partial redemption of Debentures of $15.8 million, the repayment of long-term debt of $4.0 million and the repurchase of common shares of $3.8 million.

Contractual obligations and capital resource requirements

The table below summarizes the Company’s maximum contractual obligations by due date:

		Less than
	Total	1 year	1 – 3 years	3 - 5 years	After 5 years
Contractual obligations	$	$	$	$	$
Long-term debt	122.0	1.8	45.0	74.7	0.5
Lease obligation	0.5	0.1	0.2	0.2	―
Short-term indebtedness	3.8	3.8	―	―	―
	126.3	5.7	45.2	74.9	0.5

The Company maintains two secured credit facilities with Canadian chartered banks. The borrowing capacity of the first credit facility is determined by a borrowing base calculation, subject to a maximum of $55.0 million. This credit facility bears interest at the lender’s prime rate plus 1.50%, or based on a spread to banker’s acceptance. At December 31, 2023, the Company had drawn $3.8 million on this facility. This facility is secured by six hotel properties, one investment property and the Company’s ferry business. The Company’s second credit facility has a maximum borrowing capacity of $30.0 million and bears interest at the lender’s prime rate plus 1.00%. At December 31, 2023, the Company had not drawn on this facility. This facility and a corresponding term loan are secured by five hotel properties. This facility matures in November 2027. Both facilities are subject to an annual review. Any decline in the fair value or profitability of the pledged assets may limit the Company’s access to the full amount of these credit facilities.

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FOURTH QUARTER

A comparison of results for the three months ended December 31, 2023, and 2022, is as follows:

	Three months ended	Three months ended
	December 31, 2023	December 31, 2022
	$	$
Revenue
Hotel and rental revenue	14.7	15.2
Provision of services	1.5	2.9
Investment and other income	8.9	1.5
	25.1	19.6
Expenses
Operating expenses	10.1	10.1
Cost of services provided	1.1	1.3
General and administrative expenses	1.4	0.8
Property taxes and insurance	1.0	0.8
Depreciation and amortization	2.6	2.4
Interest and accretion	1.5	1.8
Income before income taxes	7.5	2.5
Provision for income taxes	―	1.1
Net income	7.5	1.3
Other comprehensive income	8.7	19.1
Comprehensive income	16.1	20.4

Hotel and rental revenue decreased by $0.5 million, from $15.2 million to $14.7 million year over year due to the winding down and closure of one hotel as part of the Talisman development.

The Company had net income of $7.5 million in the fourth quarter of 2023 compared to $1.3 million in the same period in 2022. The $8.1 million gain recorded on exiting the 1111 Atwater development is the largest factor in the increase year-overyear.

The Company had OCI of $8.7 million in the fourth quarter of 2023 compared to $19.1 million in 2022. The primary reason for the decrease year-over-year is the reduced revaluation gains on certain hotel properties in 2023 compared to 2022.

The provision for income taxes for the quarter was reduced due to changes in unrecognized deferred tax timing differences and recognition of a previously unrecognized benefit.

For the three months ended December 31, 2023, Clarke’s basic and diluted EPS was $0.54, compared to $0.10 for the same period in 2022.

Cash provided by operating activities was $5.2 million for the fourth quarter of 2023, compared to using $0.2 million in the same period in 2022. Cash flows in the fourth quarter of both 2023 and 2022 were driven mainly by the hospitality and ferry operations. In 2022, the cash flow was offset by capital expenditures of $0.9 million for additions to the real estate inventory under development.

Cash provided by investment activities was $2.9 million in the fourth quarter of 2023, compared to using $5.1 million in the same period in 2022. The primary sources of cash in the fourth quarter of 2023 were the proceeds on the Company’s disposition of 1111 Atwater and its two investment properties in Houston, TX, offset by additions to investment properties of $13.3 million and capital expenditures on the hotels of $3.2 million. Additions to investment properties of $8.9 million and capital expenditures of $1.4 million offset by $5.3 million of proceeds from the disposition of loans receivable and marketable securities were the drivers of the cash used in the fourth quarter of 2022.

Cash used in financing activities for the fourth quarter of 2023 was $8.2 million compared to providing $4.9 million in the same period in 2022. The primary use of cash was related to repayment of short-term indebtedness of $26.4 million, partially offset by $18.8 million of proceeds from long-term debt. Cash provided by financing activities in the fourth quarter of 2022 was related primarily to a draw of $17.9 million in short-term indebtedness and $4.1 million in proceeds from long-term debt, which were offset by the partial redemption of Debentures of $15.8 million.

8

SUMMARY OF QUARTERLY RESULTS

Key financial information for the current and preceding seven quarters is as follows:

Three months ended	Dec.	Sept.	Jun.	Mar.	Dec.	Sept.	Jun.	Mar.
	2023	2023	2023	2023	2022	2022	2022	2022
	$	$	$	$	$	$	$	$
Revenue and other income	25.1	19.2	17.8	15.4	19.6	22.2	15.1	10.2
Net income (loss)	7.5	(1.9)	(0.5)	(1.7)	1.3	3.9	(0.5)	(1.4)
Other comprehensive income (loss)	8.7	2.7	(0.3)	2.8	19.1	0.6	(20.0)	7.2
Comprehensive income (loss)	16.1	0.8	(0.8)	1.0	20.4	4.5	(20.5)	5.7
Basic EPS	0.54	(0.13)	(0.03)	(0.12)	0.10	0.27	(0.04)	(0.10)
Diluted EPS	0.54	(0.13)	(0.03)	(0.12)	0.10	0.25	(0.04)	(0.10)

As demonstrated above, our results can fluctuate significantly from quarter to quarter. The Company’s hotel and ferry businesses are seasonal in nature and their results tend to fluctuate throughout the year. Revenue is generally highest in the third quarter due to increased leisure travel during the summer months. While certain expenses fluctuate according to revenue and operating levels, other expenses such as property taxes, insurance and interest are generally fixed and are incurred evenly throughout the year. In addition, the accounting for the accrued pension benefit asset can cause significant volatility to OCI and comprehensive income (loss) due to changes in assumptions and the impact of the accounting requirements of the asset ceiling under IFRS. Further volatility in net income, OCI and comprehensive income (loss) can be caused by the timing of various fair value adjustments to the Company’s property and equipment and investment properties.

FINANCIAL INSTRUMENTS

In the normal course of operations, the Company uses the following financial and other instruments:

• To generate investment returns, the Company may invest in equity, debt and other securities. These instruments may have interest rate, market, credit and foreign exchange risk associated with them.

• To manage foreign exchange, interest rate and general market risk, the Company may enter into futures and forward exchange contracts. These instruments may have interest, market, credit and foreign exchange risk associated with them. Clarke may hedge its foreign currency exposure on U.S. dollar denominated investments. The Company does not currently have any futures or foreign exchange contracts in place.

The Company has a significant number of financial instruments. Notes 1, 3, 4, 10, 11, 12, 13, and 23 to the audited consolidated financial statements for the year ended December 31, 2023 and the Company’s 2023 Annual Information Form, provide further information on classifications in the financial statements, and risks, pertaining to the use of financial instruments by the Company.

RELATED PARTY TRANSACTIONS

The Company was party to the following related party transactions during the year ended December 31, 2023:

• The Company entered into and fully drew upon a 6.00%, $35.0 million credit facility from a company owned by Clarke’s Chairman and his immediate family member. Interest of $0.9 million was incurred on this credit facility in 2023.

• The Company was a party to rental and information technology agreements with companies owned by the Company’s Chairman and his immediate family member. During 2023, the Company paid $0.3 million (2022 – $0.3 million) under these agreements.

• The Company provided administrative and asset management services to two pension plans it sponsors and charged $0.9 million (2022 – $2.2 million).

• The Company provided and received services with entities owned by the Company’s Chairman and his immediate family member with a fair value of $0.3 million (2022 – $0.2 million). The Company provided hotel management services in exchange for receiving legal, accounting, tax, construction, and pre-construction consulting services.

9

Subsequent to the end of the year, the Company agreed to sell the shares of a wholly owned subsidiary, Holloway Lodging US Inc. (“HLUS”) to an entity owned by the Company’s Chairman, Mr. George Armoyan and his immediate family member for US$3.2 million. The primary asset of HLUS is a vacant office building located at 222 Benmar Drive, in Houston, TX. The transaction constitutes a "related party transaction" pursuant to Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions ("MI 61-101"). The Company is exempt from the requirements to obtain a formal valuation and minority shareholder approval in connection with the sale in reliance on the exemptions contained in sections 5.5(a) and 5.7(1)(a) of MI 61-101, respectively, as the fair market value of the transaction does not exceed 25% of the Company’s market capitalization. The transaction was reviewed and approved by the Board of Directors of the Company, excluding Mr. George Armoyan, who abstained from voting on the matter. The transaction is subject to certain post-closing adjustments and is expected to close in March 2024. The Company recorded a fair value adjustment loss on this investment property in the year ended December 31, 2023. The Company may need to record additional fair value changes in the statement of earnings in future periods due to the ultimate settlement of the post-closing adjustments.

Key management consists of the directors and officers of the Company. The compensation incurred is as follows:

Year ended December 31, 2023	Board of directors	Officers	Total
	$	$	$
Salary and fees	0.1	0.4	0.5
Pension value	0.3	―	0.3
Total	0.4	0.4	0.8

DISCLOSURE CONTROLS AND INTERNAL CONTROLS OVER FINANCIAL REPORTING

In accordance with Canadian Securities Administrators National Instrument 52-109 - Certification of Disclosure in Issuers’ Annual and Interim Filings, the Company has filed certificates signed by the President & Chief Executive Officer and the Chief Financial Officer that, among other things, report on the design and effectiveness of disclosure controls and procedures and the design and effectiveness of internal controls over financial reporting.

Management has also designed internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. The President & Chief Executive Officer and the Chief Financial Officer have supervised the Company’s management in the evaluation of the design and effectiveness of the Company’s internal controls over financial reporting as of the end of the period covered by the annual filings and believe the design and effectiveness to be adequate to provide such reasonable assurance using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013).

There have been no changes in the Company’s disclosure controls and procedures or internal controls over financial reporting during the year ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, the effectiveness of the internal controls over financial reporting.

ENVIRONMENTAL MATTERS

The Company’s businesses are exposed to the following environmental risks in conducting regular operations: (i) contamination of owned or leased property; and (ii) contamination of the environment relating to spills or leaks originating from the Company’s ferry.

The Company’s businesses regularly review their operations and facilities to identify any potential environmental contamination or liability. Limited internal reviews, which may include third party environmental assessments, have been conducted at all the Company’s wholly owned real estate. These limited reviews identified no material remediation issues or potential risks and there have been no material events arising subsequently that would indicate additional obligations.

The Company believes it and its businesses comply in all material respects with all relevant environmental laws and regulations. The Company is not aware of any material uninsured pending or proceeding actions against it or any of its businesses relating to environmental issues.

10

MATERIAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

Please refer to notes 1 and 2 of our consolidated financial statements for the year ended December 31, 2023 for a detailed discussion regarding our material accounting policies and application of significant accounting judgments, estimates and assumptions.

Valuation of property and equipment

Land and buildings and components are revalued on a sufficiently regular basis using third party offers, internal models or external appraisals, when available, so that the carrying amount of an asset does not differ materially from its fair value at each reporting date. The Company has established a methodology to evaluate when circumstances indicate that the carrying amount may differ materially from its fair value, which include: significant changes in operating performance, economic activity, regional development opportunities and changing competition in the markets in which each property operates.

The Company performed a revaluation analysis on its hotels during the year using external appraisals, management’s knowledge of various markets and capitalization rates obtained from independent third parties. The Company obtained nine external appraisals which resulted in four hotels with revaluation increases, two hotels with revaluation decreases and three hotels with no change in value. Two hotel properties were valued using an income capitalization model prepared internally. Significant assumptions used in the internal income capitalization model included budgeted cash flow forecasts for 2024 and capitalization rates. The capitalization rates used ranged from 6.25% to 11.50%. If the capitalization rates were 0.25% higher/lower, the estimated fair value would result in a change of $1.0 million to property and equipment. Based on the Company’s methodology, the remaining five hotels did not require a revaluation.

As a result, a revaluation increase of $19.8 million was recorded among six hotels and a revaluation decrease of $3.7 million among two hotels. Property and equipment increased by $16.1 million as a result, with a net increase of $11.8 million included in other comprehensive income and a net increase of $4.3 million recorded in earnings.

During the year ended December 31, 2022, the Company used a combination of external appraisals, comparable hotel sales prices and professional judgement to revalue its hotel portfolio. Property and equipment was increased by $32.9 million as a result of these revaluations . An increase of $1.3 million was recorded in earnings and an increase of $31.6 million was recorded in other comprehensive income.

Fair value of investment properties

The Company’s significant investment properties as at December 31, 2023, consisted of one office building, a multi-building residential rental complex under construction and a residential rental building.

During the year, the Company sold two of its three investment properties located in Houston, TX. These investment properties were remeasured at their fair value less costs to sell, resulting in a fair value decrease of $4.3 million being recorded. The Company also evaluated whether these purchase prices were indicative of the fair value of the Company’s remaining Houston, TX investment property. Using management’s professional judgement and expertise, the Company estimated the value of this remaining investment property and recorded a fair value decrease of $3.5 million. The aggregate of these fair value decreases and the eventual realized loss on the Company’s investment properties of $7.8 million is included in investment and other income in the consolidated statements of earnings.

Changes to the fair value of the Company’s investment properties may occur periodically, based on operating performance, economic activity, regional development opportunities and new competition in the markets in which they operate.

Pension benefits and asset ceiling

The costs of defined benefit pension plans and the present value of the pension obligation are determined using actuarial valuations. An actuarial valuation involves making various assumptions which may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, mortality rates and future pension increases. Due to the complexity of the valuation, the underlying assumptions and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions.

All assumptions are reviewed at each reporting date. In determining the appropriate discount rate, management considers the interest rates of corporate bonds in the respective currency with at least AA rating, with extrapolated maturities corresponding to the expected duration of the defined benefit obligation. The underlying bonds are further reviewed for quality, and those having excessive credit spreads are removed from the population of bonds on which the discount rate is based, on the basis that

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they do not represent high quality bonds. The mortality rate is based on publicly available mortality tables. Future salary increases and pension increases are based on expected future inflation rates. Management is also required to make certain assumptions regarding the quantification of the asset ceiling, which impacts the accrued pension benefit asset recorded on the consolidated statements of financial position.

CAUTIONARY STATEMENT REGARDING USE OF NON-IFRS ACCOUNTING MEASURES AND RATIOS

This MD&A makes reference to “book value per share” and “net operating income” (or “hotel net operating income”). Book value per share and net operating income are not financial measures or ratios calculated and presented in accordance with IFRS and should not be considered in isolation or as a substitute for any financial measures or ratios of performance calculated and presented in accordance with IFRS. These non-IFRS financial measures and ratios are presented in this MD&A because management of Clarke believes that such measures and ratios enhance the user’s understanding of our historical and current financial performance.

Book value per share is measured by dividing shareholders’ equity of the Company at the date of the statement of financial position by the number of common shares outstanding at that date. Net operating income is defined as revenue less expenses. Net operating income measures operating results before interest, depreciation, amortization and income taxes.

The following table reconciles hotel net operating income to income before income taxes of the Company’s hospitality segment as disclosed in the consolidated financial statements for the year ended December 31, 2023.

	Year ended	Year ended
	December 31, 2023	December 31, 2022
	$	$
Income before income taxes	10.9.	9.2
Deduct:
Investment and other income	(4.3).)	(1.8)
Add:
Non-operating corporate expenses	0.9.	1.0
Depreciation and amortization	10.0.	9.4
Interest and accretion	5.0.	3.0
Hotel net operatingincome	22.5.	20.8

Clarke’s method of determining these amounts may differ from other companies’ methods and, accordingly, these amounts may not be comparable to measures used by other companies.

Due to rounding, numbers presented throughout this document may not sum precisely to the totals provided.

FORWARD-LOOKING STATEMENTS

This MD&A may contain or refer to certain forward-looking statements relating, but not limited, to the Company’s expectations, intentions, plans and beliefs with respect to the Company. Often, but not always, forward-looking statements can be identified by the use of words such as “plans”, “expects”, “does not expect”, “is expected”, “budgets”, “estimates”, “forecasts”, “intends”, “anticipates” or “does not anticipate”, “believes”, or equivalents or variations of such words and phrases, or state that certain actions, events or results, “may”, “could”, “would”, “should”, “might” or “will” be taken, occur or be achieved. Forward-looking statements include, without limitation, those with respect to the future or expected performance of the Company’s investee companies, changes in these securities holdings, the future price of oil, changes to the Company’s hedging practices, currency fluctuations and requirements for additional capital. Forward-looking statements rely on certain underlying assumptions that, if not realized, can result in such forward-looking statements not being achieved. Forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause the actual results of the Company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements. Such risks and uncertainties include, among others, the Company’s investment strategy, legal and regulatory risks, general market risk, potential lack of diversification in the Company’s investments, interest rates, foreign currency fluctuations, the sale of Company investments, the expected timing for completion of the sale of HLUS, the expectation that the Company's redeployment of capital from its asset dispositions, renovations and repurposes will be accretive to the Company’s shareholders, the anticipated timing for completion of the first phase of the Talisman residential redevelopment, reliance on key executives and other factors. With respect to the Company’s investment in hotel and ferry operations, such risks and uncertainties include, among others, weather conditions, safety, claims and insurance, uninsured losses, changes in levels of business and commercial travel and tourism, increases in the supply of accommodations in local markets, the recurring need for renovation and improvement of hotel properties, labour relations, and other factors. Although the Company has attempted to identify important

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factors that could cause actions, events or results not to be as estimated or intended, there can be no assurance that forwardlooking statements will prove to be accurate as actual results and future events could differ materially from those anticipated in such statements. Other than as required by applicable Canadian securities laws, the Company does not update or revise any such forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events. Accordingly, readers should not place undue reliance on forward-looking statements.

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